Hopping in the Convertible

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The convertible bond market is off to another record year. Although convertibles usually are associated with technology and communication companies, there seems to be plenty of demand for bricks-and-mortar businesses. Indeed, any company with a growth story seems to be eligible. Last year, 103 convertibles were issued, with a record total value of $28.8 billion. In the first two months of this year, 39 convertibles were issued, with a value of $13.4 billion.

“The companies that have done very well are those that are issuing convertible bonds,” says Tom Sugiura, a vice president and convertible bond analyst at Bear Stearns & Co. in New York. “Returns have been very good for issues, so it has become a very hot market in which to raise capital.”

And who can blame the companies? From a financial standpoint, convertibles work well for a number of reasons. The cost of borrowing is lower (coupons generally fall in the 5 to 6 percent range), and for some firms, the market for high- yield debt remains uncertain. By issuing debt paper through the convertible market, this becomes an attractive financing alternative, and there is less dilution than for an issuance of common shares, because of the conversion premium.

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Already this year a number of non-high-tech companies have hit the convertible market, among them advertising agency Young & Rubicam Inc. and independent power producer Calpine Corp. “There are no specific parameters on what makes a good candidate for a convertible; every company is different,” says Jeffrey Cohen, a managing director with Silverado Capital Management, a Saddle Brook, N.J.- based convertible arbitrage fund.

Young & Rubicam, which went public in 1998, took advantage of the convertible market, in part “to add a good element of diversity to our portfolio of investors,” says CFO Jay Kushner. The convertible offering of $287.5 million last January was issued with a healthy conversion premium of 30 percent, which Kushner says sent a good signal to the market. It also allowed the company to retire more expensive debt, says Kushner. “When you factor in the dilution of the number of shares versus having a lesser number of shares and higher interest expense, you get positive results.” — Steve Bergsman